On Wednesday 26 July, the Federal Reserve (Fed) raised its benchmark interest rate by 0.25% to a new target range of 5.25% to 5.5% – the highest level in 22 years.
The increase followed a month-long reprieve at the previous meeting in June, when the Federal Open Market Committee (FOMC) held the benchmark rate steady. At the time, Fed chair Jerome Powell indicated the central bank would take a more gradual approach to rate rises to account for months of earlier increases, the fallout of a regional banking crisis, and already declining inflation.
In its statement, the FOMC said inflation remained “elevated”, jobs gains in recent months had been “robust” and economic activity was expanding “at a moderate pace”. The committee said it remained “highly attentive to inflation risks” and would “continue to assess additional information and its implications for monetary policy”.
Is the Fed ready to halt its aggressive rate tightening cycle or not?
The market thinks it is.
The next FOMC meeting is in 8 weeks, a longer-than-usual interval, in which policymakers will have two more labour market reports and two more consumer price reports to inform them. The annual Jackson Hole conference in a month’s time provides an appropriate venue for Powell to send signals if any new data takes him by surprise.
Markets were little changed by the Fed’s decision, with US stocks and Treasury yields both slightly lower on the day. Traders in the interest rate futures market were betting on a roughly 50-50 chance of another interest-rate increase later this year.
Powell has raised hopes the Fed would be able to pull off a “soft landing”, noting that economists had reversed their call that the US economy would enter a recession. Having raised its benchmark rate from near zero in March 2022 to 5.5%, the Fed is now closer to a level of borrowing costs it regards as “sufficiently restrictive” to bring inflation down to its 2% target in a timely manner.
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